NSC Groupe (EPA:ALNSC) May Have Issues Allocating Its Capital

What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into NSC Groupe (EPA:ALNSC), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for NSC Groupe:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0029 = €125k ÷ (€77m - €34m) (Based on the trailing twelve months to June 2022).

Therefore, NSC Groupe has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.3%.

Check out our latest analysis for NSC Groupe

Historical performance is a great place to start when researching a stock so above you can see the gauge for NSC Groupe's ROCE against it's prior returns. If you're interested in investigating NSC Groupe's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at NSC Groupe. To be more specific, the ROCE was 3.4% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on NSC Groupe becoming one if things continue as they have.

On a side note, NSC Groupe's current liabilities are still rather high at 44% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From NSC Groupe's ROCE

In summary, it's unfortunate that NSC Groupe is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 35% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with NSC Groupe (including 1 which makes us a bit uncomfortable) .

While NSC Groupe may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.